In today’s every day life, products from oil and natural gas have become more and more important. They are used to fuel cars, heat homes, cook food etc. If one could imagine how the world would be without crude oil, natural gas and their derivative products, one can obviously see how important these products are. They have a big influence on different perspectives of everyday life, environment, and economy. When an economy grows, it is followed by an increase in the demand of these products as they are used to run industries, transport, etc.
To get these products a number of different activities are performed in oil industry.
Activities in oil industry are broken down into two broad categories upstream and downstream. Upstream refers to exploration and production activities, finding oil and pumping it out of the ground. Downstream generally refers to everything else required to transform the crude oil and natural gas into useful products. Included among downstream activities are oil refining and marketing and natural gas storage and transmission.
We hear more and more on the news about movements in crude oil prices per barrel and how they affect our lives. However, crude oil is not useful in the state it comes out from the ground. It contains hundreds of different types of hydrocarbons all mixed together. To have anything useful from crude oil, these different types of hydrocarbons need to be separated.
This is done in a refinery. In an oil refinery, crude oil is broken down into parts and refined into useful products. An oil refinery is normally a large industrial site where crude oil is processed. The refinery turns crude oil into a whole range of substances such as gasoline, jet fuel etc. It also determines the quality and the specifications of these products. Thus, refineries have a big importance and then become a key link in the value chain of oil industries.
As refineries are important in the value chain in the oil industry, this study considers the oil industry and refineries in general and puts more emphasis on Statoil Mongstad (refinery at Mongstad) in particular. The Statoil Mongstad gets the most attention, as this study is part of the Mongstad pilot project. In this project, there was a need of doing a prestudy that would shed light on the value chain at Statoil Mongstad. To achieve this objective, this prestudy
has described the following aspects: organisation structure, production at Mongstad, pricing structure, cost structure and Statoil Mongstad supply chain.
Mongstad refinery was built in 1972 and then started its activities. From 1989, the refinery was upgraded and extended. Mongstad’s annual production is equivalent to 180% of petrol consumption in Norway. Mongstad port is Norway’s biggest port by tonnage and Europe’s second biggest oil port. The Mongstad refinery primarily converts crude oil into light products, with an annual production capacity of roughly ten million tonnes. Gasoline, jet fuel, diesel oil and gas oils are the principal products from this facility.
At Mongstad, there are four different entities – Crude oil terminal, Vestprosess, Product Technology and Customer Service Centre, and Statoil Mongstad (the refinery). These entities work in collaboration and make a part of the refinery’s supply chain. In this thesis, we will discuss the relationship and collaboration between these entities and their role in the oil supply chain. As a good organisation contributes to the success of a business, a study of some organisation, administration and performance measurement tools becomes also necessary.
Crude oil refining is done through different processes. In this study, different production processes used in Mongstad refinery are discussed in order to get insight into activities at Mongstad.
The price of crude oil has a significant importance in the petroleum industry. Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. An increase in crude oil prices will increase the expected revenue of an oil company. The difference between raw products prices and final products prices gives a gross margin. Refineries are supposed to continuously improve their contribution margin between its buy price of input (crude oil, etc.) and its sales price on refined products. There are different opportunities and threats on this contribution margin. Gross margin could be increased by reducing the price of input and increasing the price of output. Nevertheless, a large gross margin will not have a big importance if the cost of running the refinery is high.
Thus the net margin is also important. A discussion on price and costs of running a refinery is presented in this study.
Together, good strategies and efficiency in different activities of organisation, production, pricing, and managing costing are essential to run successfully a refining business. However, to produce most value for the customer at least cost requires an efficient supply chain that responds to changes in the market adequately.
Objective of the study
The study has a purpose to conduct a descriptive study of Statoil Mongstad's business management and operations, in addition to its supply chain. Thus, the study aims to give a comprehensive overview and understanding of different business aspects for a refinery like Statoil Mongstad.
Scope and Limitations
Value creation in a company can be studied from different perspectives. When studied from the shareholder or other stakeholder perspective, the research is mostly based on the information collected from the shareholder or stakeholders. When looked at from the stock market perspective, the information used in the study is collected mainly from the stock market. If the study is based on the company perspective then the information used will mainly be collected from the company. However due to the time limit and the scope of this study, we are obliged to make some limitations.
Value creation at Mongstad is a very broad issue. We limited our thesis to the descriptive level of some perspectives in order to cover a big part of value creation at Mongstad. In our study is tackled from the point of view of the company. We choose this point of view since it is actually the company that puts in place different strategies. We therefore believe that our objectives would be well met if we use the company perspective. We have then collected data and conducted interviews only in Statoil ASA. Although we are conducting this work on that point of view, some secondary data from the oil industry are also used when it is judged imminent.
Some information was not detailed due to the data confidentiality. Many factors can affect value creation of a company such as technology, weak business climate, political situation, etc. We did not cover all the above factors since the background information will be covered
in general and it is not the main focus of our research. However some of them are mentioned or discussed partially when it is necessary.